Wednesday, January 12, 2011

The December federal budget deficit came in as expected, and the calendar year 2010 deficit ($1.28 trillion) was $194 billion lower than in 2009. Things are still awful, but they are getting better; thanks to rising incomes, higher realized capital gains, and higher corporate taxes, federal revenues have been rising at a 9-10% annual rate for most of the past year. As I noted before, if this keeps up the budget could be balanced in 5 years if spending were frozen at current levels. And there's no reason that revenues can't continue to grow at a 10% annual rate, as the next chart (below) shows. In fact, that's very typical in the wake of recessions. Revenue growth has in fact bounced back faster following the recent recession than it did following the 2001 recession.

It's also worth noting that the federal deficit is now about 8.5% of GDP, comfortably lower than the high of 10.3% that was reached one year ago. This improvement was due to 4.7% growth in nominal GDP, 7.9% growth in revenues, and a 1% decline in spending.